United States District Court, Southern District of New York
January 4, 2000
WILLIAM ARAMONY, PLAINTIFF,
UNITED WAY OF AMERICA, INDIVIDUALLY AND AS ADMINISTRATOR AND NAMED FIDUCIARY UNDER THE UNITED WAY OF AMERICA REPLACEMENT BENEFIT PLAN, AND AS ADMINISTRATOR OF THE UNITED WAY SUPPLEMENTAL BENEFITS AGREEMENT, UNITED WAY REPLACEMENT BENEFIT PLAN AND UNITED WAY OF AMERICA SUPPLEMENTAL BENEFITS AGREEMENT, DEFENDANTS.
The opinion of the court was delivered by: Scheindlin, District Judge.
OPINION AND ORDER
In 1992, United Way of America ("UWA") terminated William
Aramony, its President and Chief Executive Officer of twenty-two
years. Following his termination,
Aramony sued UWA for unpaid pension benefits and salary, as well
as legal expenses; UWA asserted a number of counterclaims,
including breach of fiduciary duty and breach of employment
agreement. Following a five-day bench trial, this Court concluded
"that UWA owes Aramony certain monies, and that Aramony owes
certain monies to UWA." Aramony v. United Way of America,
28 F. Supp.2d 147, 153 (S.D.N.Y. 1998) ("Aramony I"). On appeal,
the Second Circuit affirmed this Court's decision in all but one
respect and remanded the case for reconsideration of that single
issue. See Aramony v. United Way Replacement Benefit Plan,
191 F.3d 140 (2d Cir. 1999) ("Aramony II").
The issue on remand is relatively narrow. In 1984, UWA created
a non-qualified pension plan ("Replacement Benefit Plan" or
"RBP"), which was intended to replace benefits that could not be
paid under UWA's qualified defined benefit pension plan as a
result of limitations imposed by the Internal Revenue Code
("I.R.C."); Aramony was one of the executives eligible for the
RBP. See Aramony I, 28 F. Supp.2d at 153. After trial, I
concluded that UWA was estopped from arguing that Aramony was not
entitled under the RBP to benefits offsetting the impact of
26 U.S.C. § 401(a)(17), because UWA had represented to Aramony that
he would receive those benefits. See id. at 169-71. The Second
Circuit disagreed, ruling that Aramony had not satisfied the
requirement in ERISA cases that a party asserting promissory
estoppel demonstrate "extraordinary circumstances." Aramony II,
191 F.3d at 150-53 (citing Bonovich v. Knights of Columbus,
146 F.3d 57, 63 (2d Cir. 1998)). The Second Circuit then stated:
We therefore reverse the determination of the
district court that United Way is estopped from
denying that the RBP provides a benefit offsetting
the effect of § 401(a)(17). As part of its estoppel
analysis, the district court decided, however, that
the RBP was ambiguous on this point. We remand,
therefore, so that the district court may consider
whether United Way is contractually bound by the RBP
itself to provide the benefit to Aramony.
Id. at 153. The parties have briefed the remand issue and have
agreed to rely exclusively on the evidence already in the record.
Because the background of this case has already been described
in detail, see Aramony I, 28 F. Supp.2d at 153-66, I will
summarize here only the facts relevant to the remand issue.
UWA is a non-profit corporation organized under the laws of New
York and having its principal place of business in Alexandria,
Virginia. Id. at 153. UWA is governed by a volunteer Board of
Governors and a full-time President and Chief Executive Officer
("CEO"). Id. The Executive Committee of UWA's Board of
Governors ("Executive Committee") is a subcommittee of the Board
of Governors that is authorized to adopt pension plans and
executive compensation arrangements on behalf of UWA. Id.
Aramony served as UWA's President and CEO from 1979 until March
16, 1992. Id.
The general practice at UWA was for the Executive Committee to
adopt the concept of a pension plan, but not to decide the
details of the plan. Id. at 153-54. Those details were worked
out by Stephen Paulachak, a Senior Vice President of UWA and the
person principally responsible for handling UWA's pension plans
and executive compensation arrangements, and Mutual of America
Life Insurance Co. ("Mutual"), with whom UWA had signed a group
annuity contract. Id.
On February 27, 1984, the Executive Committee followed this
procedure when it adopted the RBP. Id. at 154. At that meeting,
Paulachak distributed an agenda setting forth the basic
principles of the RBP, as well as the general features of
other pension-related plans which were approved at the same
meeting. Id. In his agenda, Paulachak explained the purposes of
the RBP: (1) to restore the pension benefit lost due to the
restrictions imposed by I.R.C. § 415, which imposes dollar
limitations on the amount of benefits that can be paid out under
a qualified pension plan; and (2) to restore the pension benefit
lost as a result of Rev. Rul. 80-359, which excluded deferred
compensation from the definition of compensation under UWA's
qualified benefit plan. Id. at 154 & n. 1. The minutes of the
meeting show that the Executive Committee followed Paulachak's
recommendation and authorized UWA to establish an RBP. Id. at
Consistent with its usual practice, the Committee expected that
Paulachak would work out the specific terms of the plan with
Mutual. Id. Paulachak informed Mutual that the Board had
approved an RBP and requested that Mutual create a final plan
document. Id. For reasons that are not entirely clear, Mutual
did not provide Paulachak with a final plan document until May
1985. Id. On May 16, 1985, Paulachak signed Mutual's plan
document on UWA's behalf. Id. UWA's highly paid executives,
including Aramony, whose qualified pension benefits were likely
to be affected by the I.R.C. restrictions, were eligible for the
RBP. Id. at 153.
In 1986, Congress passed 26 U.S.C. § 401(a)(17), entitled
"Compensation limit," which states:
(A) In general. — A trust shall not constitute a
qualified trust under this section unless, under the
plan of which such trust is a part, the annual
compensation of each employee taken into account
under the plan for any year does not exceed $150,000.
(B) Cost-of-living adjustment. — The Secretary shall
adjust annually the $150,000 amount in subparagraph
(A) for increases in the cost-of-living at the same
time and in the same manner as adjustments under
section 415(d); except that the base period shall be
the calendar quarter beginning October 1, 1993, and
any increase which is not a multiple of $10,000 shall
be rounded to the next lowest multiple of $10,000.
26 U.S.C. § 401(a)(17). Benefits are calculated under UWA's
qualified defined benefit plan by multiplying a fixed ratio by
salary (a five-year average) and multiplying the result by years
of service. See Aramony I, 28 F. Supp.2d at 169 n. 21. Effective
after January 1, 1988, § 401(a)(17) caps the amount of salary
that may be used in this formula to calculate qualified benefits.
On September 12, 1990, UWA's Executive Committee met to discuss
a number of topics. See Pl.Ex. 30. At that meeting, the
Executive Committee amended the RBP to add a component which
would replace benefits lost under UWA's qualified benefit plan as
a result of a change in the benefit formula mandated by the Tax
Reform Act of 1986 (the "1990 Amendment"). See Aramony I, 28
F. Supp.2d at 155; Pl.Ex. 30, at 2-3. No plan document
incorporating the 1990 Amendment was ever generated. See Aramony
I, 28 F. Supp.2d at 155. At that same meeting, UWA's Executive
Committee increased Aramony's 1991 salary to $365,000 (from
$345,000). See Pl.Ex. 30, at 2. The minutes of this meeting
indicate that Paulachak told the Executive Committee that the
salary increase "was desirable to maintain growth in the
President's pension base." Id.
In October 1988 and January 1989, Mutual sent Aramony estimates
of his pension benefits. See Aramony I, 28 F. Supp.2d at 169.
The figures contained in these estimates "reveals Mutual's belief
that Aramony's RBP benefits would make up for the effect of §
401(a)(17) on Aramony's defined benefit plan." Id. In addition,
"[t]he Annual Valuation Reports that Mutual prepared for UWA
between 1988 and 1991 explicitly stated that Mutual had taken
into consideration the effect of § 401(a)(17) on the RBP. The
reports also contained benefit figures that were consistent with
§ 401(a)(17) make-up benefit." Id. at 170 n. 23.
The Second Circuit remanded so that this Court could determine
whether UWA was "contractually bound by the RBP itself to
provide" Aramony with a benefit offsetting the impact of §
401(a)(17). See Aramony II, 191 F.3d at 153. If UWA must offset
the impact of § 401(a)(17), then Aramony will receive $3,221,057
in pension benefits under the RBP; if not, then Aramony will
receive $1,872,143. See Aramony I at 169-70 & n. 22.*fn1
Two provisions of the RBP are relevant to this issue. Article
I, entitled "Purpose of the Plan," states:
This Plan is an arrangement for a select group of
management and highly compensated personnel, and all
rights hereunder shall be governed by and construed
in accordance with the laws of the State of Virginia.
This Plan is being installed to provide a mechanism
for securing the pension benefit promises made to its
management and highly compensated key employees who
may receive relatively smaller retirement benefits
under the existing pension arrangement than rank and
file employees will receive as a result of
limitations imposed by the Internal Revenue Code and
rulings thereunder on the amount of pensions payable
to the highly compensated. This Plan is in addition
to current compensation and other employee benefits.
Pl.Ex. 1, at 1. Article V, entitled "Contributions and Benefits,"
states, in relevant part:
Section 5.01 The Committee, pursuant to Section
3.02 shall specify which of the formulae set forth in
Sections 5.02, 5.03, 5.04 or 5.05 shall be applicable
to each eligible group of Participants.
Section 5.02 (Excess over Section 415 Limit). The
contribution to be made to this Plan, in each Plan
Year, on behalf of each eligible Participant, shall
be equal to the difference between:
(a) the contribution that would have been made on
behalf of such Participant under the Pension Plan
sponsored by the Employer without the limitation on
the annual addition imposed by Section 415 of the
Internal Revenue Code, and
(b) the amount that has actually been contributed
on such Participant's behalf and allocated to his
individual account under that Plan.
Section 5.05 (Additional benefits or
contributions). The benefit to be provided under this
Plan on behalf of each eligible Participant shall be
the sum of (a) plus (b) below:
(a) the yearly contributions required pursuant to
Section 5.02, 5.03, or 5.04, whichever is applicable,
(b) any additional contributions or benefit amount
that the Employer has agreed to pay to the
Participant pursuant to either a contractual
commitment or a resolution of the Board of Trustees
of the Employer.
Pl.Ex. 1, at 3-5. The RBP indicates that the parties selected §
5.02 as the applicable provision. See Pl.Ex. 1, at 3.
In Aramony I, this Court concluded that the RBP was ambiguous
as to whether it was intended to compensate for the impact of §
401(a)(17) on Aramony's pension benefits:
What renders the plan document ambiguous on this
issue is the plan's expressly stated purpose. . . .
[T]he effect of § 401(a)(17), which became effective
in 1988, was to reduce the § 415 make-up benefits of
highly-compensated RBP participants. This result — an
unanticipated windfall for UWA and an unexpected loss
of pension benefits for RBP participants — directly
contravenes the plan's stated purpose of securing the
pension benefits promised by UWA to its key
employees. This conflict between the plan's stated
purpose and the effect of § 401(a)(17) renders the
[RBP] ambiguous on the question of whether it
provides for § 401(a)(17) make-up benefits.
Aramony I, 28 F. Supp.2d at 170. In its decision to remand, the
Second Circuit noted this finding of ambiguity. See Aramony II,
191 F.3d at 153. In their briefs on the remand issue, neither
party challenges that finding. See Memorandum of William
Aramony on Remand from the Second Circuit Court of Appeals in
Support of Order Making Further Findings of Fact ("Aramony Mem.")
at 6; UWA Mem. at 1-2.
"The primary objective in contract interpretation is to give
effect to the intent of the contracting parties as revealed by
the language they chose to use." Sayers v. Rochester Telephone
Corp. Supplemental Management Pension Plan, 7 F.3d 1091, 1094
(2d Cir. 1993) (citation omitted). When the language chosen by
the parties is ambiguous as to their intent, "then extrinsic
evidence of the parties' intent may be looked to as an aid to
construing the contractual language." Id. at 1095. Citing
principles of contract construction, UWA offers three ways to
resolve the ambiguity in the RBP without considering extrinsic
evidence. None of UWA's suggested methods, however, sufficiently
resolve the ambiguity to prevent consideration of extrinsic
First, UWA contends that Article I is a general statement of
the RBP's purpose and Article V is the specific implementation of
that purpose, with the applicable provisions covered by the RBP
therefore limited to those stated in Article V. The essence of
this argument is that, because § 401(a)(17) had not been enacted
when the RBP was created, the parties could not have intended the
RBP to include § 401(a)(17). See UWA Mem. at 5 ("A reasonable
interpretation of these provisions, read together, is that the
RBP's purpose is to replace benefits lost by reason of the tax
law limitations expressly identified elsewhere in the more
In Aramony I, however, this Court stated that "[t]he absence
of any mention of § 401(a)(17) from the [RBP] is not, of course,
determinative of the RBP's scope. That plan was signed in 1985,
one year before Congress enacted § 401(a)(17)." Aramony I, 28
F. Supp.2d at 170 n. 24. The RBP states that its purpose is "to
provide a mechanism for securing the pension benefit promises
made to [UWA's] management and highly compensated key employees
who may receive relatively smaller retirement benefits . . . as a
result of limitations imposed by the Internal Revenue Code and
rulings thereunder on the amount of pensions payable to the
highly compensated." Pl.Ex. 1, at 1. Section 401(a)(17) is a
limitation imposed by the I.R.C. on the amount of pensions
payable to the highly compensated. Moreover, § 401(a)(17)
deprives Aramony of the pension benefit promises made by UWA.
See Aramony I, 28 F. Supp.2d at 169 n. 21 ("If . . . the RBP
were interpreted as offsetting the effect of § 401(a)(17), then
plan participants would be entitled to the amount of benefits
that UWA's Executive Committee anticipated paying out, and UWA's
employees anticipated receiving, when the RBP was enacted in
1985."). Thus, the stated purpose of the RBP appears to include §
401(a)(17) within its scope.
Second, UWA argues that the RBP does not include an offset for
§ 401(a)(17) because
the language of § 5.02 of the RBP, the provision applicable in
this case, only mentions § 415. But the fact that § 5.02 only
mentions § 415 does not resolve the ambiguity, which comes from
the interplay of Article V, of which § 5.02 is a part, and
Article I, the general statement of purpose. As explained above,
it is not clear from the language of the RBP that the general
statement of purpose in Article I does not include the limitation
on pension benefits contained in § 401(a)(17). Indeed, the
ambiguity is reinforced by the fact that § 401(a)(17) takes away
some of the § 415 make-up benefit explicitly mentioned in § 5.02.
See Aramony I, 28 F. Supp.2d at 170 ("[T]he effect of §
401(a)(17), which became effective in 1988, was to reduce the §
415 make-up benefits of highly-compensated RBP participants.").
Third, UWA argues that the purpose of the RBP was to eliminate
some, but not all, limitations on Aramony's pension benefits. To
support this argument, UWA looks to the structure of Article V,
which allows for a choice of limitations to be offset, and the
fact that the parties chose only to offset the limitation in §
415. There are several problems with this argument. First, the
fact that the parties chose the provision that only limited § 415
is of little consequence because UWA admits that "the surrounding
circumstances demonstrate that the original RBP was intended to
cover both" the § 415 limitation and the deferred compensation
limitation. See UWA Mem. at 6 n. 6. Second, § 401(a)(17), if
not offset, reduces the § 415 make-up benefit. See Aramony I,
28 F. Supp.2d at 170 ("[T]he effect of § 401(a)(17) . . . was to
reduce the § 415 make-up benefits of highly-compensated RBP
participants."). Thus, even if the purpose of the RBP was simply
to provide a full make-up benefit for § 415, the failure to
offset the limitation contained in § 401(a)(17) would frustrate
this purpose. Finally, in order to find that the RBP encompasses
an offset for the limitation contained in § 401(a)(17), it is not
necessary to find that the purpose of the RBP was to compensate
Aramony for all tax limitations. Rather, as discussed below,
there is sufficient extrinsic evidence to conclude that UWA
specifically intended the RBP to provide an offset for §
Because the principles of contract construction and a more
detailed examination of the RBP's language fail to resolve the
ambiguity, it is necessary to consider extrinsic evidence of the
parties' intent. See I.V. Services of America, Inc. v. Trustees
of the American Consulting Engineers Council Insurance Trust
Fund, 136 F.3d 114, 120 (2d Cir. 1998) ("Given that the Plan
language is not, by itself, clear and unambiguous . . ., matters
outside of the contract terms themselves become relevant."). Both
parties urge the Court to consider UWA's conduct while the RBP
was in effect. "It is hornbook law that where there is ambiguity
in a contract the intent of the parties may be ascertained by
reference to their subsequent course of conduct." Factors Etc.,
Inc. v. Creative Card Co., 444 F. Supp. 279, 281-82 (S.D.N Y
1977); see also I.V. Services, 136 F.3d at 120 (noting that
"evidence of how the Plan language has been interpreted by the
Plan administrators in the past" was "[o]f particular
Arguing that the RBP is not self-amending, UWA points to the
fact that it passed the 1990 Amendment, which accounted for a
change mandated by the Tax Reform Act of 1986, but passed no
similar amendment to account for § 401(a)(17).*fn2 UWA contends
that, because it did not amend the RBP to account for the passage
of § 401(a)(17), it did not intend to include § 401(a)(17) within
the scope of the RBP. The problem with UWA's argument is
that, if the parties thought that the RBP already included an
offset of § 401(a)(17), the lack of an amendment detailing that
fact would not be evidence of their lack of intent.
Consideration of the extrinsic evidence compels the conclusion
that UWA thought that the RBP included an offset of § 401(a)(17).
In the same document memorializing the 1990 Amendment, UWA's
Executive Committee increased Aramony's salary to $365,000 in
order "to maintain growth in [his] pension base." Pl.Ex. 30, at
2. If the RBP did not contain an offset of § 401(a)(17), the
increase in Aramony's salary would do nothing to increase his
pension base because § 401(a)(17) capped his pension base at a
level lower than his previous salary.*fn3 The fact that UWA
increased Aramony's salary in order to increase his pension
benefits provides strong evidence that UWA did not think that §
401(a)(17) limited those benefits.
The trial testimony of Stephen Paulachak, who served as UWA's
benefit plan administrator from 1979 to 1989, corroborates this
Q: Mr. Paulachak, do you recall in 1991 that there
was a board meeting in which Mr. Aramony's
compensation was increased for purposes of
maintaining growth in the president's pension base?
A: In '91?
Q: Mr. Paulachak, if Mr. Aramony's pension benefits
were capped by 415, would increasing his compensation
result in an increase in his pension benefits?
Q: Was it your understanding that the logic behind
maintaining or behind increasing his compensation for
purposes of increasing his pension benefits was to
increase the benefit under 401(a)(17)?
Q: Would you explain your answer?
A: The consideration was simply the total benefit Mr.
Aramony would retire under and not necessarily the
vehicle which could be funded and so the purpose of
the salary increase, compensation increase, was to
raise the overall benefit to Mr. Aramony. It happened
that it would be funded out of a make-up or
Q: But if Mr. Aramony's benefits were limited by 415
that wouldn't happen, is that correct?
A: That is correct.
Q: So there had to be another benefit that would be
increased by increasing his salary?
Q: And that benefit was 401(a)(17)?
A: That is correct.
Testimony of Stephen Paulachak ("Paulachak Tr.") at 440-41.
UWA argues that Paulachak could not make binding decisions
regarding Aramony's pension and that Paulachak's 1998 testimony
about this 1991 meeting is unreliable, both because of the
passage of time and because Paulachak had moved to another
position by 1991. But Paulachak's testimony is important not for
his belief as to whether the RBP includes an offset for §
401(a)(17); what matters is Paulachak's explanation that UWA's
decision to increase Aramony's compensation for the purpose of
increasing his pension benefits makes no sense unless the RBP
includes an offset for § 401(a)(17).
Other extrinsic evidence supports the conclusion that UWA
thought that the RBP provided an offset for § 401(a)(17). In
Aramony I, this Court found that "UWA was plainly aware that
Mutual had interpreted the RBP as compensating for the effect of
§ 401(a)(17)." Aramony I, 28
F. Supp.2d at 170 n. 23. The evidence supporting this finding was
summarized as follows:
The Annual Valuation Reports [(the "AVRs")] that
Mutual prepared for UWA between 1988 and 1991
explicitly stated that Mutual had taken into
consideration the effect of § 401(a)(17) on the RBP.
See Pl.'s Exs. 7-11. The reports also contained
benefit figures that were consistent with a §
401(a)(17) make-up benefit. See id.; Testimony of
Robert Sadler ("Sadler Tr.") at 324-25. Finally,
Robert Sadler, the former head of Mutual's branch
office that handled the UWA account, testified that
at an April 28, 1992 meeting, he informed UWA
personnel of Mutual's understanding that the RBP
compensated for qualified benefits that were lost as
a result of § 415, Rev. Rul. 80-359, and §
401(a)(17). See Sadler Tr. at 335-37.
Aramony I, 28 F. Supp.2d at 170 n. 23. In addition, the October
1988 and January 1989 benefit estimates, which "were prepared on
UWA's behalf by Mutual," included an offset for § 401(a)(17).
See Aramony I, 28 F. Supp.2d at 169. As with Paulachak's
testimony, the importance of this evidence is not whether Mutual
believed that the RBP provided an offset for § 401(a)(17); what
matters is that UWA knew about Mutual's belief and did not
correct it. See E. Allan Farnsworth, Contracts § 7.13, at 489
(3rd ed. 1999) ("Sometimes the conduct of the parties after the
contract is made indicates the meaning that they attach to the
contract language subsequently in dispute. Such `practical
construction' is given great weight by the courts.").
UWA argues that the Court should not rely on the benefit
estimates because that is merely the same evidence that formed
the basis of Aramony's estoppel argument. But some of the
evidence that supported the finding of promissory estoppel
necessarily provides the basis for understanding the parties'
course of performance. See Farnsworth, Contracts § 7.13, at
490 ("It is sometimes difficult to draw the line between conduct
that is the basis for a course of performance, on the one hand,
and conduct that is the basis for a waiver or modification, on
In addition, UWA urges this Court to reconsider its finding
that the AVRs "assumed that the RBP provided § 401(a)(17) make-up
benefits." Aramony I, 28 F. Supp.2d at 171 n. 25. The AVRs,
which state only that § 401(a)(17) was "taken into consideration
in the calculations," are unclear as to whether their benefits
calculations included an offset for § 401(a)(17). See Pl.Ex.
7-10. Nevertheless, it is important to note that UWA does not ask
this Court to reconsider its more fundamental finding that "UWA
was plainly aware that Mutual had interpreted the RBP as
compensating for the effect of § 401(a)(17)." Aramony I, 28
F. Supp.2d at 170 n. 23. Whether the AVRs assumed that the RBP
provided an offset for § 401(a)(17) is not relevant to the remand
issue. The relevant fact — and the one not challenged by UWA — is
that UWA knew that Mutual thought the RBP included an offset for
§ 401(a)(17) and did not inform Mutual that its understanding was
incorrect. That supports the conclusion that UWA thought the RBP
included an offset for § 401(a)(17).
To summarize, the RBP is ambiguous as to whether it includes an
offset of the limitation on pension benefits contained in §
401(a)(17). The extrinsic evidence conclusively demonstrates that
UWA thought that the RBP did provide an offset of § 401(a)(17).
Accordingly, UWA "is contractually bound by the RBP itself to
provide the benefit to Aramony." Aramony II, 191 F.3d at 153.
For the foregoing reasons, UWA is required to pay Aramony RBP
benefits totaling $3,221,057. All other awards contained in
Aramony I were affirmed by the Second Circuit and remain in
effect. In addition, UWA is required to pay postjudgment
interest on the amount of the total award to Aramony, at the rate
provided for in 28 U.S.C. § 1961, from November 20, 1998. The
parties are directed to prepare a Final Judgment and the Clerk is
directed to close the case.